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International expansion, diversification and regulated firms' nonmarket strategy

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  • Bonardi, Jean-Philippe
  • Urbiztondo, Santiago
  • Quélin, Bertrand

Abstract

Previous studies have shown that regulated firms tend to diversify for different reasons than unregulated ones. This is the case for product but also for geographical diversification, i.e. international expansion. The logic generally advanced is that regulated firms tend to diversify when they face costly and difficult relationships with the regulatory authority in charge of their sector. This approach, however, does not explain (1) what is really at the core of the problem in regulated firms’ relationships with regulators, (2) why these firms cannot overcome part of the problem by developing nonmarket strategies –lobbying, campaign contributions, etc.– to influence regulatory decisions, and (3) why they sometimes opt for international expansion rather than product diversification. In this paper, we propose a theoretical model that provides potential answers to these questions. We start by considering the firm-regulator relationship as an incomplete information problem, in which the firms know things that the regulator does not, but can cannot convey hard information about these things. In this setting, we show that when firms face tough nonmarket competition domestically, going abroad can create a mechanism that makes information transmission credible and therefore strengthen their position in their home market. International expansion, in consequence, can be a way to solve some of the problems that regulated firms face at home in addition to a way for these firms to grow their business abroad.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14436.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:14436

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Keywords: International diversification; regulated firms; lobbying;

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Thomas P. Lyon & John W. Maxwell, 2004. "Astroturf: Interest Group Lobbying and Corporate Strategy," Working Papers 2004-18, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Wiersema,Margarethe & Bowen, Harry P., 2005. "Corporate international diversification: the impact of foreign competition, industry globalization and product diversification," Vlerick Leuven Gent Management School Working Paper Series 2005-6, Vlerick Leuven Gent Management School.
  4. Palmer, Karen, 1991. "Diversification by Regulated Monopolies and Incentives for Cost-Reducing R&D," American Economic Review, American Economic Association, vol. 81(2), pages 266-70, May.
  5. Gerpott, Torsten J. & Jakopin, Nejc M., 2005. "The degree of internationalization and the financial performance of European mobile network operators," Telecommunications Policy, Elsevier, vol. 29(8), pages 635-661, September.
  6. Matthias Dahm & Nicolas Porteiro, 2005. "Informational Lobbying under the Shadow of Political Pressure," Discussion Papers 1409, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Steve Thompson, 1999. "Increasingly Marginal Utilities: Diversification and Free Cash Flow in Newly Privatized UK Utilities," Review of Industrial Organization, Springer, vol. 15(1), pages 25-42, August.
  8. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  9. Sappington, David E. M., 2003. "Regulating horizontal diversification," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 291-315, March.
  10. Wolf, Bernard M, 1977. "Industrial Diversification and Internationalization: Some Empirical Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 26(2), pages 177-91, December.
  11. Dunning, John H, 1979. "Explaining Changing Patterns of International Production: In Defence of the Eclectic Theory," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 41(4), pages 269-95, November.
  12. MB Sarkar & S Tamer Cavusgil & Preet S Aulakh, 1999. "International Expansion of Telecommunication Carriers: The Influence of Market Structure, Network Characteristics, and Entry Imperfections," Journal of International Business Studies, Palgrave Macmillan, vol. 30(2), pages 361-381, June.
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